Consumer Credit in U.S. Falls Twice as Much as Estimated Amid Job Losses

U.S. Consumer Credit Decreased for Fifth Straight Month in June

By Vincent Del Giudice

Aug. 7 (Bloomberg) -- Borrowing by U.S. consumers dropped in June for the fifth straight month as the unemployment rate rose, getting loans remained difficult and households put off major purchases.

Consumer credit fell $10.3 billion, or 4.92 percent at an annual rate, to $2.5 trillion, according to a Federal Reserve report released today in Washington. Credit dropped by $5.38 billion in May, more than previously estimated. The series of declines is the longest since 1991.

A jobless rate near the highest in 26 years, stagnant wages and falling home values mean consumer spending, about 70 percent of the economy, will take time to recover even as the recession eases. Incomes fell the most in four years in June as one-time transfer payments from the Obama administration’s stimulus plan dried up, and unemployment is forecast to exceed 10 percent next year before retreating.

“Consumers just didn’t want to add to their debt burdens,” Richard Yamarone, director of economic research at Argus Research Corp. in New York, said before the report. “You don’t head out to the mall or the auto lot when the economy is hemorrhaging jobs.”

Economists had forecast consumer credit would drop $5 billion in June, according to the median of 33 estimates in a Bloomberg News survey. Projections ranged from declines of $11.9 billion to $1 billion. The Fed initially reported that consumer credit decreased by $3.2 billion in May.

Credit Cards

Revolving debt, such as credit cards, fell by $5.25 billion in June, a record 10th straight drop, according to the Fed’s statistics. Non-revolving debt, including auto loans and mobile-home loans, declined by $5.04 billion. The Fed’s report doesn’t cover borrowing secured by real estate.

While the downturn abated in the second quarter as government stimulus programs started to kick in, the three- month period capped the worst retrenchment by consumers since 1980. Gross domestic product shrank at a better-than-forecast 1 percent annual pace after a 6.4 percent drop the prior three months, the Commerce Department figures showed last week.

The economy was forecast to shrink at a 1.5 percent pace, according to the median estimate of 78 economists surveyed by Bloomberg.

Government spending rose at a 5.6 percent pace last quarter, the most since 2003, as President Barack Obama’s $787 billion stimulus program began to take effect. The funds are aimed at helping states retain workers, financing infrastructure projects and reducing tax payments.

Consumer Spending

Consumer spending, meanwhile, fell at a 1.2 percent pace following a 0.6 percent increase in the prior quarter. Purchases slid 2 percent since the peak at the end of 2007 -- the most since a 2.4 percent decline in the 1980 recession.

U.S. personal incomes, which include interest income, dividends, rents and other payments as well as wages, tumbled 1.3 percent in June, more than forecast and erasing the previous month’s gain, figures from the Commerce Department showed Aug. 4 in Washington. Spending rose 0.4 percent in June as prices climbed. Adjusted for inflation, purchases fell 0.1 percent, the report showed.

Wages and salaries, which drive recoveries in spending, fell 4.7 percent in the 12 months through June, the biggest drop since records began in 1960, the Commerce figures showed.

Decreasing pay is not the only hurdle for consumers. Plunging home prices and stocks reduced household net worth by a record $13.9 trillion from the third quarter of 2007 through this year’s first quarter, according to figures from the Fed.

Job Losses

The pace of U.S. job losses slowed more than forecast last month and the unemployment rate dropped for the first time in more than a year, the Labor Department said today in Washington. Payrolls fell by 247,000, after a 443,000 loss in June, and the jobless rate unexpectedly dropped to 9.4 percent from 9.5 percent, which was the highest in 26 years.

The White House warned the jobless rate is still likely to reach 10 percent, and with companies from Boeing Co. to Verizon Communications Inc. continuing to cut costs, any rebound in hiring may not come until 2010.

Credit-card defaults climbed to a record in June as more consumers fell behind on payments because of rising unemployment and bankruptcies, according to Fitch Ratings statistics released on July 31. Charge-offs, the cost of loans that card issuers have given up on collecting, rose to 10.79 percent last month, 64 percent higher than the same period last year, the Fitch Prime Credit Card Index showed.

Defaults Slowing

Fitch said the rate of increase “slowed significantly” from earlier this year, providing “a glimmer of hope that charge-offs may soon plateau” in coming months. Loans delinquent at least 60 days declined to 4.31 percent in June from 4.45 percent in the previous month, Fitch said.

Sales of cars and light trucks fell to a 9.7 million annual rate in June from a 9.9 million annual rate the month before, according to Woodcliff Lake, New Jersey-based industry research firm Autodata Corp.

In July, sales rose to an 11.3 million pace, the highest since September, Autodata reported this week. That compares with February’s 9.1 million rate, which was the lowest since 1981. Auto sales will likely rebound further as a federal “cash-for-clunkers” program boosts demand for cars.

We had to hand $trillions of taxpayer dollar$ over to the banks so they would start lending again. That is what we are told. Now, they are still not lending. There are no consequences for them refusing to do what they were supposed to do with the money. The American people do not even seem to know, much less care. The problem is not our corrupt 'leaders', or their corrupt corporate partners, or the corrupt unions. The problem is *us*. They do what they do because they know that they can get away with it, and that we will not do anything significant about it. We have just the government we deserve.

Will we eventually do something about it? A lot of people here seem convinced that we will have riots in the streets if the checks stop being printed and sent out. I am not so sure. I am afraid there will be protests, then crackdowns, then we will have a different America. It will be like China or the Middle East, where pervasive, endemic corruption in both government and business is the accepted norm. There will be the occassional show trial of an offender to placate the masses, and things will just continue as usual. This may be our future.

At some point consumer spending to support subsistance living will grind out a new reality of subsistance employment,and other spending.But it can't be a pretty sight for us,accostumed to high pay for low level work; easy jobs;lots of vacation time,frivilous spending,eating out 5 or 6 times a week etc. As the screws tighten things are gonna change back toward the 50;s and before.More home cooked meal of dried beans,peas,cheap meat once or twice a week.
Unless all the gloom and doom I read here is a pile of horse hockey,hard times are a coming.It will never be like it was 4 or 5 years ago.Those balloons popped,and until we get manufacturing,and othe industries up and running again;there ain't no recovery!!
MM

At some point consumer spending to support subsistance living will grind out a new reality of subsistance employment,and other spending.But it can't be a pretty sight for us,accostumed to high pay for low level work; easy jobs;lots of vacation time,frivilous spending,eating out 5 or 6 times a week etc. As the screws tighten things are gonna change back toward the 50;s and before.More home cooked meal of dried beans,peas,cheap meat once or twice a week.
Unless all the gloom and doom I read here is a pile of horse hockey,hard times are a coming.It will never be like it was 4 or 5 years ago.Those balloons popped,and until we get manufacturing,and othe industries up and running again;there ain't no recovery!!
MM

I agree with MM's assessment. We're working towards a new economic reality and outlook. If, as I expect, the economic turbulence is not over, there will be many more folks that develop saving and spending habits that will more closely resemble those of our Grandparents (some Parents, ) than our the typical spending habits of the last ten years.

This development of a nation of tightwads will scuttle any plans that the gubmint has to "prime the pump" and get the consumer to spend our way out of this recession/depression. Consequently, we will find ourselves not in a "V" or "U" shaped recession, but in an "L" shaped recession with a long and persistent depressed level of economic activity.

Jeff B.

__________________"The real destroyer of the liberties of the people is he who spreads among them bounties, donations and benefits"Plutarch

If there is one thing I have learned over the years, it is that the economy is *not* predictable. However, the fundamentals also remain in play. The amount of available credit to both consumers and businesses is still shrinking. We are continuing to lose a quarter million jobs a month. The ranks of the long-term unemployed are swelling. Unemployment bennies are about to run out for a lot of those folks. Government spending is still on an uncontrolled rampage, with no signs of abatement. If anything, it is accellerating. Exports continue to shrink. The only thing that is keep consumer spending up is the 'cash for clunkers' program, and that is merely shifting the spending of a pretty small group of people (new car buyers) forward. That will soon be exausted, and consumer spending will then take an even steeper dive. The bond markets are showing every sign of an imminent implosion of unprecidented scope; one the government cannot hope to even begin to dent even if they had the cash from all previous bailouts, corporate buyouts and TARP purchase programs combined (which they obviously do not). Most of the other developed nations appear to be in about the same or worse shape than we are.

Under these conditions, I do not see any way that even a continuation of this weak recovery is possible for long.

when the tattoo parlors, nail salons, and cell phone stands have all closed
then I will know something is up

__________________The best grape kool aid is made with hot tap water then cooled for an hour or more in the fridge. The sugar melts and mixes properly. Making kool aid with cold tap water is just barbaric.

No credit = a hell of a lot less consumer spending = bankrupt businesses dropping like flies = massive unemployment = even less consumer spending = even more business bankruptcies = more unemployment = downward economic death spiral

No credit = a hell of a lot less consumer spending = bankrupt businesses dropping like flies = massive unemployment = even less consumer spending = even more business bankruptcies = more unemployment = downward economic death spiral

We are in this mess largely because of excess credit in
society . Consumers are probably going to continue
reducing their debt exposure for the next 10 years .

__________________All paper is a short position on gold . “Gold is money. Everything else is credit.”

“If we don’t believe in freedom of expression for people we despise, we don’t believe in it at all.” ( Noam Chomsky )

‘you can judge a man’s spirit by the amount of truth he can tolerate.’ .... Nietzsche

No credit = a hell of a lot less consumer spending = bankrupt businesses dropping like flies = massive unemployment = even less consumer spending = even more business bankruptcies = more unemployment = downward economic death spiral

I'm not saying it's happytime here. But, we could not go on like we were. As Ross notes, we are where we are precisely because so much of the economy is dependent on credit-fuelled consumer spending. The sooner we can be past all of this boot-strapping, the better.

Obviously. But a healthy economy requires a happy medium between totally unrestricted credit coupled with irresponsible buying, and a total credit freeze with a near cessation of business activity. We are nowhere near any happy medium. We are screwed.

It is also important to note that commercial credit is frozen up just as hard as consumer credit. That is just as bad, if not worse.

It makes me wonder just what those megafinancial institutions are doing with all the $trillions of taxpayer dollars$ our corrupt government forked over to them. They are sure not lendiing it to anyone.

It makes me wonder just what those megafinancial institutions are doing with all the $trillions of taxpayer dollars$ our corrupt government forked over to them. They are sure not lendiing it to anyone.

I watched an interview with Elizabeth Warren, the chairwoman of the oversight panel charged with auditing the TARP program, this morning and she reiterated what she said last quarter. When asked where the money is the reply was we still don't know. Why? Becuase Treasury isn't providing the information. She also spoke about Citi's self-audit on its lending in the last quarter. BFD were pretty much here words. It's a self-audit using made-up accounting rules that don't mean a thing. Here's the link: http://video.foxbusiness.com/?catego...92724c08f 046